In general terms, a recession is commonly understood to be two consecutive quarters of negative GDP growth. Since GDP reflects the total amount of goods and services produced during a specific period, it is regarded as the most comprehensive indicator of economic health.

From a technical perspective, the National Bureau of Economic Research (NBER), a private non-profit organization known for its economic research, is responsible for officially declaring the beginning and end of recessions. The NBER defines a recession as “a significant decline in economic activity that is widespread across the economy and lasts more than a few months.”

However, this determination can take several months, and by the time the NBER officially recognizes a recession, the economic slowdown may have already concluded, and recovery could be underway.

What does a recession mean? While two consecutive quarters of negative GDP growth typically mark the onset of a recession, this is not an absolute rule. The NBER employs additional criteria to assess whether a recession has occurred. For instance, negative GDP growth in one quarter may not indicate an economic contraction; it could result from a significant increase in inventories and trade balance, while the “real” economy continues to grow.

The challenge with the “two consecutive quarters of negative GDP growth” definition is that it complicates the assessment of whether the economy is in a recession. This definition overlooks other macroeconomic indicators such as unemployment rates.

Economists argue that factors like industrial production, consumer confidence, and capacity utilization should also be considered when evaluating the presence of a recession. Declines in these macroeconomic indicators provide a clearer signal that a recession is occurring.

Essentially, recessions are somewhat arbitrary classifications, and economic slowdowns typically begin well before any official recession is declared.

How do you know if we’re in a recession? The simplest way to recognize a recession is through observable changes in daily life. You may notice a slowdown in residential and commercial construction in your area. People you know might experience job losses or pay cuts. Prices for goods may start to drop as retailers accumulate excess inventory due to decreased consumer spending, prompting them to reduce prices to clear stock. This is a practical indication that a recession is underway.

From a statistical perspective, the manufacturing and service PMIs are likely to fall below 50. Additionally, unemployment rates may rise, potentially exceeding 6% or more. In the U.S., jobless claims should increase significantly, surpassing 300,000 and possibly reaching 400,000 or higher.